Using JPMorgan Chase & Co Options to Out Smart Market Risk
Date Published: 2017-05-30
Written by Ophir Gottlieb
LEDE
There is a way to trade JPMorgan Chase & Co (NYSE:JPM) options that is risk protected but out smarts the market with the timing of the trade.
If we leverage the idea that the stock "won't go down very much" but add two strict risk protections in case it does, while also avoiding earnings, we find the one risk protected option trade right after earnings that has been a consistent winner, has returned over 85% annualized returns in the last six-months and has been a bastion of safety over the last 3-years.
The Trade After Earnings
While most of the focus in the market is on the earnings move for a stock, for JPMorgan Chase & Co, irrespective of whether the earnings move was up or down, if we waited two-days after the market move from earnings, and then sold an out of the money put spread, the results were very strong and risk was well defined.
Even further, if we added a stop loss to the short-put spread to limit the losses even more, we find a fairly conservative option trade with strong returns.
We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:
And then we add a stop loss:
Rules
* Open short put spread 2 day after earnings.
* Close short put spread 29 days later.
* Use the option that is closest to but greater than 30-days away from expiration.
* Use a stop loss at 50% to reduce risk.
Here is the timing of the trade in an image:
And here are the results of implementing this strategy:
Focusing in just the month after earnings, we see a 56.2% return over a total of 11 earnings releases. We also see that this idea won 8 times and lost 3 times.
The Logic
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.
If it gapped down -- that gap is over. If it beat earnings, the downside move is already likely muted. Here's how this strategy has done over the last two-years:
The "single-month" approach returned 26% over the last seven earnings cycles -- that's just seven months of trading.
Finally, here are the results over the last 1-year:
That's about 20% over three earnings cycles, with all three turning out to be winners. And for completeness, here are the results over the last six-months.
If we consider that the 14.6% return was just over two-months (two earnings cycles, holding the short-put spread with a stop loss for one-month each), that 14.6% in two-months is 87.6% annualized.
WHAT HAPPENED
To see how to do this for any stock and for any strategy with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
The author has no position in JPMorgan Chase & Co as of this writing.
Back-test Link